Recent leveraged loan price volatility presents increased risks and opportunities for CLO managers, Fitch Ratings said. Managers in volatile markets are challenged to make credit calls that may significantly affect long-term performance for CLO investors. Market price volatility also contributes to the slowdown in new CLO creation.

Much of the price volatility relates to either the energy (oil & gas) or metals & mining (coal) sectors, which combined make up roughly 7% of the loan universe.

Recent defaults have increased the trailing 12-month default rate to nearly 10.0% and 12.7% in the energy and metals & mining sectors, respectively, which Fitch expects to continue increasing through 2016.

However, Fitch’s overall leveraged loan default forecast sits significantly lower at 2.5%. Recent loan price trends are not necessarily indicative of Fitch’s broader default expectations. Excluding these two sectors, we estimate the loan default rate for the rest of the loan market will be less than 1% in 2016.